Out of sight Article icon

Out

From May 2016, cigarettes will be sold in the UK in unbranded packaging, following votes by British MPs and Lords last month to stub out advertising at their point of sale.

Gone from cigarette packets will be the logos that tobacco companies have spent billions of pounds developing and promoting, stripped away in the name of what Deborah Arnott, chief executive of health charity Ash, has called the ‘most important public health reform’ of Britain’s last parliament.

Brands will only be able to use their names on otherwise generic packaging, which will also carry large health warnings.

Separate UK legislation that came into force this month is forcing shopkeepers to cover up tobacco products, as part of an extension to all retailers of a display ban introduced for supermarkets two years ago.

While health lobbyists are celebrating, the tobacco industry claims that plain packaging will be bad for retailers, good only for criminals and of little use in helping achieve the Department of Health’s objectives.

That’s plain speaking on both sides of the debate then. But what does it mean for cigarette brands and can branding have a future in an industry where it is no longer permissible at point of sale or on packaging?

Tobacco brands are hugely valuable. According to the latest tobacco report from valuation and strategy consultancy Brand Finance, Marlboro, the world’s most valuable tobacco brand, is also one of the most iconic marques in any category – with its $13.1 billion (£8.9 billion) value greater than that of Starbucks ($11.1 billion), L’Oreal ($12.5 billion) and Kellogg’s ($7 billion).

However, the consultancy claims cigarette brand values are in decline, due to the expectation of plain packaging taking effect, as well as other ‘creeping  regulation’ and a continuing gradual decline in smoking in western markets.

Several of the top ten global tobacco brands have seen their brand values fall in the past year, with Winston losing 21 per cent, Pall Mall declining by 17 per cent, Camel by 16 per cent and Marlboro by three per cent.

‘Brands are hugely valuable intangible assets that in many cases account for over a third of the value of a business,’ states the report.

‘The prohibition of other forms of consumer communication has made packaging absolutely fundamental to the ability of manufacturers to maintain and develop brands that have been built over decades. Neutralising it has therefore been argued to amount to the destruction or appropriation of business assets.’

Indeed, the tobacco industry is putting up fierce opposition. Imperial Tobacco believes Britain’s plain packaging legislation  contravenes European Union law, while British American Tobacco (BAT) contends that the legislation also violates World Trade Organisation rules regarding international trade.

Legal challenges are expected and the effect of Britain’s legislation may not be completely clear until after May 2017, with manufacturers and retailers having 12 months after plain packaging’s introduction to clear branded packets from their supply chains.

Arguments about the effect of the legislation have only one national reference point, with Australia having introduced plain packaging for cigarettes in December 2012. Ireland, which is also introducing plain packaging, is yet to actually do so. However, there are fierce disagreements about what the Australian evidence shows.

‘The evidence is plain,’ states Iain Watkins, communications manager at Imperial Tobacco Group, whose brands, including Lambert & Butler, Richmond, Embassy and John Player Special, control 45 per cent of the UK market.

‘Since its introduction, it has had no discernible impact on youth smoking or smoking prevalence. According to the Australian government, youth smoking has increased from 2.5 per cent to 3.4 per cent, whilst illicit trade has increased by 25 per cent since plain packaging’s introduction and now accounts for 14.3 per cent of total consumption.

‘Brands help smokers navigate the wide range of products available and if you take that away, price become the only driver of consumer choice. The cheapest available product is what people will gravitate towards and the cheapest product is always the illicit one.’

Japan Tobacco International (JTI), which owns the Benson & Hedges and Silk Cut, Winston and Camel brands, takes a similar view.

‘Our view is that plain packaging has not accelerated the long-term decline in smoking in Australia, whilst the black market in Australia appears to have increased as international criminals unsurprisingly try to exploit large tax hikes, and the opportunities that plain packaging presents,’ states Jeremy Blackburn, UK head of communications.

At BAT, which has brands including Dunhill, Kent, Lucky Strike, Pall Mall and Rothmans, but only a small share of the UK cigarettes market, corporate and regulatory affairs director Jerome Abelman notes that Australia’s illegal tobacco sales are now at their highest level for seven years – an increase costing the Australian taxpayer A$1.1 billion (£570 million) a year in lost excise duties.

BAT predicts that the costs to the UK government associated with increased consumption of untaxed and illicit cigarettes following plain packaging’s implementation are likely to be higher than the forecast £340 million a year.

It also warns that plain packaging could make young people ‘brand loyal’ to unregulated and illegal tobacco brands.

As with all statistics, however, it depends which ones you read.

Quarterly figures from the Australian Bureau of Statistics issued in March showed a 2.9 per cent fall in cigarette consumption, contributing to a 12.2 per cent yearly fall from December 2013 to December 2014.

BAT responded that plain packaging had little to do with this reduction, with the decisions of successive Australian governments to raise cigarette pricing leading to smokers increasingly buying cigarettes from the black market or opting for cheaper brands.

‘Just because people are spending less money on tobacco doesn’t mean they’re reducing the amount they smoke,’ said Scott McIntyre, BAT Australia area communications manager. ‘In fact, many are smoking more for less.’

Separate research from Cancer Center Victoria, published in March in the journal Tobacco Control, stated that plain packaging for cigarettes in Australia has reduced the appeal of smoking among adolescents and promoted smokers to think about quitting.

Based on surveys with thousands of Australians before and after plain packaging was introduced, it found that one year after the measure, standardised packaging was associated with an increase in the number of people thinking about giving up smoking and trying to quit.

Children aged between 12 to 17 found standardised packaging less appealing, while researchers found no evidence of an increase in the consumption of illegal cigarettes as a result of the legislation, the research concluded.

However, Philip Morris International (PMI), whose brands include Marlboro and Chesterfield, called the research ‘another attempt to mask a failing experiment as a success’.

The company said the research ‘mostly presents an evaluation of perceptions, shows no impact on tobacco consumption and conspicuously omits an analysis of the impact on smoking prevalence’.

Arnott disagrees with the tobacco industry’s interpretation of the statistics, criticising it for ‘bully-boy tactics and misinformation’.

A wider question is what happens to the big tobacco brands in the UK after plain packaging takes effect.

‘It’s bound to affect the less well-known brands first,’ says Robert Haigh, communications manager at Brand Finance. ‘A big brand like Marlboro can rely for a certain amount of time on the brand equity it has accumulated over the years.

‘Their names will remain well-known for a significant amount of time so it may even have some slight beneficial effect on very big brands.

‘But any brand that is smaller will have no scope to improve its image or how well-known it is and ultimately plain packaging will result in decay and declining sales.

‘Ultimately, I think cigarettes in the UK will be reduced to commodities. The UK will be the first very significant market to bring in plain packaging and there will be an increasing critical mass for policies of this kind to be implemented elsewhere.’

Haigh predicts tobacco brands will counter the effect of plain packaging by moving into clothing and other merchandising. He also argues that e-cigarette brands, which are currently tiny in value compared to cigarette marques, may ultimately surpass them in value.

‘It may not even be that long before that takes place,’ he says. ‘The one ray of light for tobacco companies is that e-cigarettes are still relatively unrestricted.

‘If it gets to the point where there are no ways to use really well-established brands, it might be that they make a strategic decision in one territory to completely stop tobacco sales and move to e-cigarette sales because that’s a growing market and potentially the only future for nicotine in the developed world.’

JTI’s Blackburn is far more positive. ‘We believe that tobacco will remain a commercially significant category for retailers,’ he says, ‘especially as we do not expect plain packaging to reduce the number of smokers, albeit that we expect it will often change what brand they choose to smoke.’

That’s the conundrum facing brands and policymakers. If Blackburn is right, governments may need to go back to the drawing board. In the UK at least, however, tobacco companies face watching their brands go up in smoke.